In the Schumpeterian world we live in, it is accepted that companies must change continuously if they don’t want to risk being defunct. Innovation is the creative fire which ushers in the new. Gurus of the current age, such as Ram Charan, management consultant and former Harvard don, have attempted to place it within a framework that day-to-day managers can try to replicate.

Given that innovation lies at the heart of great management, boards and senior managements can do worse than examine if their companies meet some of the thumb rules that support a culture of innovation.

This can be understood only by examining why, even with similar managers and organization cultures, some simply seem to be more equal than others. I have found that the more complex a business is, the more dimensions along which one can find new, better and more useful ways of running it. Charan is fond of regaling his audiences with anecdotes about his early experiences in his family’s shoe shop in Agra. While not denying that even shoe stores must innovate to survive, frequent and institutionalized innovation is more likely in automobile plants and aircraft companies, steeped as they are in complexity. Being in a complex business does not mean one will become creative, but boards of companies in simpler, more commoditized businesses will need to dig deeper to find dimensions on which their business can innovate.

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An innovation culture is also attached to the quality of people in an organization and how they work together. Study after study has shown that collaborative work and diversity of thought foster a creativity far in excess of the Edisonian ideal of a solitary genius thinking up new inventions. Popular perception, perhaps fostered by the large number of garage-based start-ups in Silicon Valley, suggests that innovation works best in small, intimate companies. This oversimplifies the reality. Large numbers of experienced persons with diverse backgrounds are more likely to be found in the giant corporations. It is in these laboratories that there exists a vast reservoir of experience across many disciplines, which turns out to be the fountainhead of new ideas.

Also, senior management would do well to include and promote those whose collaborative skills are superior. The right incentive mechanisms will always foster some level of creativity. It will sometimes be possible to have a dot-com scenario with get-rich-quick schemes based on stock options and the like. This approach cannot be applied in all industries and at all times, since most innovative action will not see quick pay-offs. Creativity’s real spark lies in the pride of excelling at one’s work. The bulk of innovation is tough grunt work, based on a vision and a belief. Save in the movies, such ideas can have a poor strike rate, even after a patient wait of three-five years.

Companies that hope to focus on innovation-led growth need a core of managers who will stay with the company over long periods and can see projects through to completion. The long stayers, sometimes criticized for being change resistant, often have a strong feel for what can and cannot work and bring ideas and experiences. They become the bedrock of knowledge in which they can constantly improve. Boards need to see if they have a good proportion of long stayers in key roles in areas which manage innovation.

Innovation, like quality, is felt to be free. However, there is a close link between innovation and profitability. In large, profitable enterprises, where innovation-related costs are more easily afforded, such programmes are managed well. Where firms are faced with profit pressures from the start of their life, resulting in cutbacks in people and any form of surplus cost including training and research, the culture of innovation struggles to get underway. Yet, ironically, for small firms, often it is the value of their ideas rather than their immediate cash flows that they can monetize most easily.

Booz Allen Hamilton Inc., in its work on how to develop an innovative organizational DNA, has concluded that clarity of decision rights—who takes certain decisions—frees availability of information and relatively wide spans of control foster innovation.

That the hurt of not managing innovation can cut deep has not gone unnoticed. Michael Mandel, chief economist at BusinessWeek, recently noted that innovation had failed to deliver on the promise it showed in the late 1990s. Citing the poor performance of the market prices of biotechnology and pharmaceutical companies, the low growth in real wages of educated college graduates and the growing trade deficit of US companies in hi-tech sectors, Mandel worries that companies can often be deluded into thinking that they are at the cutting edge of innovation, merely because their chief executive asks for more money to do new things. Mandel seeks a national innovation index to measure the true progress of innovation. Perhaps companies should consider something similar.

Joseph Schumpeter argued that recessions were actually hotbeds of innovation. Given that innovation can make a material difference between success and failure, particularly for small- and medium-size companies, shareholders and boards may want to debate their innovation strategy at an early stage. Under capitalism, creating a climate of innovation is not a luxury, but a basic governance choice.

Govind Sankaranarayanan is CFO, Tata Capital Ltd. He writes every other Friday on issues related to governance. The views expressed here are personal. Write to him at